After the robo-signing incidents, major lenders tightened their home loan lending standards, which make many previously qualified homeowners unable to purchase a new home. With the high number of foreclosure homes for sale on the market and the stagnant real estate market, these high lending standards have obviously delayed progress.
Imagine being a young couple with impeccable credit and a stable job, but being turned down for a home loan due to lending standards that are ridiculous at best. This young couple could be putting money into the real estate market (and the local economy). Instead, they are left renting a property which not only takes away from the number of homes sold, but also prevents them from building up equity. Situations like these are simply a no-win for the banks or the couple.
Despite knowing their standards are too high, many banks have held to these standards out of fear of default. The high default rate has left banks with unusually high foreclosure inventories that are more than a burden at this point. As a result, banks have resulted to literally demolishing or giving away properties in an effort to reduce its liabilities. Clearly, something must be done to help potential homebuyers and lenders find some relief and to put the real estate market back on solid ground.
Furthermore, Congress decided to significantly lower the maximum home loan size for Federal Housing Administration (FHA) loans to a mere $625,000 (the actual limit depends upon the cost of living in your area). Overall, the limit reduced the maximum loan size by an average of $68,000 across the country. Clearly, investors and potential homebuyers alike were not thrilled about the decision that was made by Congress. This loan limit also included loans that could be secured by Fannie Mae and Freddie Mac.
Fortunately, Congress was able to reach an agreement on something (which is rare nowadays) and decided to remove the new limit on FHA loans, but left them for Fannie Mae and Freddie Mac. As a result, the FHA loan limit will revert back to its original limit of $729,750 at least until 2013.
Along with restoration of the higher loan limits (at least for FHA loans), there was finally an amendment made to the Home Affordability Refinance Program (better known as HARP) that will also provide some relief to homeowners with distressed properties. Fortunately, the cap has been removed which allows those with underwater mortgages to also apply for refinancing.
In the end, high lending standards and underwater mortgages have done more to inhibit real estate market growth than to spur it; however, the restoration of the FHA loan limit and the amendment to HARP will at least provide some room for progress. Hopefully other programs, amendments to existing programs, and high lending standards will start to change as well and provide even more room for real estate market progress.